If you're like most folks, you probably believe it's the United States.

After all, U.S. gross domestic product (or "GDP") is an incredible $18.6 trillion. That's more than 65% bigger than China's... and more than three times bigger than those of Japan, Germany, and the U.K.

But according to Stony Brook University finance professor Noah Smith, you're wrong...

In reality, China has already surpassed the U.S. We just don't know it yet because we're looking at the wrong data. It's a controversial idea, for sure. But Smith makes a compelling argument. As he explained in a Bloomberg View column this week...

This comparison is misleading, because things cost different amounts in different countries. GDP is supposed to measure the amount of real stuff – cars, phones, financial services, back massages, etc. – that a country produces.

If the same phone costs $400 in the U.S. but only $200 in China, China's GDP is getting undercounted by 50% when we measure at market exchange rates. In general, less developed countries have lower prices, which means their GDP gets systematically undercounted.

When you take these price differences into account, the picture looks a little different...

Using a wonky adjustment that economists call purchasing power parity ("PPP"), China's economy swells to more than $21.4 trillion – nearly $3 trillion bigger than the U.S. economy. More important, Smith argues China's lead is only likely to grow from here...

China's modest per-person income simply means that the country has plenty of room to grow. Whereas developed countries can only get richer by inventing new things or making their economies more efficient, poor countries can cheaply copy foreign technology or imitate foreign organizational practices. That doesn't always happen, of course – many poor countries find themselves trapped by dysfunctional institutions, lack of human capital or other barriers to development.

But there's good reason to think that China will overcome at least some of these obstacles. Economists Randall Morck and Bernard Yeung have a new paper comparing the histories of Japan and South Korea – both of which climbed out of poverty to achieve rich-country status – with the recent rise of China. They find that China's institutions are, broadly speaking, developing along the same path followed by its successful neighbors.

And data continue to suggest this is likely. Despite a slowdown in recent years, China's economy is still growing at a rate of nearly 7%, according to the latest quarterly report this week – compared with a little more than 2% in the U.S.

At that rate, Smith notes China's economy will be twice the size of the U.S. in less than two decades.

And yet, the Chinese stock market – which is also larger than any other besides the U.S. – remains one of the least owned in the world.

This is one of the biggest reasons our colleague Steve Sjuggerud turned bullish on China last year and launched his True Wealth China Opportunities advisory.

As Steve noted at the time, virtually no one owned local Chinese stocks, known as "A-shares." U.S. investors hated them. They were largely excluded from global stock market indexes, which meant large institutional investors like mutual funds couldn't touch them, even if they wanted to. And even Chinese investors – who had just been burned by a mini-boom and bust in 2015 – had no interest in buying these stocks.

Steve's contrarian call has paid off for his subscribers. But despite the big gains in Chinese stocks over the past year, most investors still don't own any Chinese stocks.

However, that may be finally starting to change...

As we've discussed, index provider MSCI finally agreed to begin including Chinese A-shares in its indexes back in June. Starting next year, hundreds of billions of dollars in institutional money will be forced into these stocks. And large private investors and hedge funds have already begun moving in advance.

But the biggest move may come from inside China itself...

A recent note from Morgan Stanley analysts pointed out that nearly $2 trillion of Chinese savings could flow back into A-shares over the next few years.

Why? Because Chinese investors increasingly have no other choice.

The Chinese government has been cracking down on speculation in many areas of the market. Equities are now one of the last remaining options for most investors. As Bloomberg reported this week (emphasis added)...

Property, overseas investments and shadow-banking products have all been targeted by China's campaign to curb financial risks over the past year. What's left?

Some analysts are betting that restrictions on other popular investment channels will lure what's often called China's giant ball of money back into stocks, which, despite steady gains, have seen a slow take up in volumes since a spectacular boom and bust in 2015.

Chinese equity holdings will swell by up to 11 trillion yuan ($1.7 trillion) in the two and a half years through end-2019 amid policies to clean up the financial system, Morgan Stanley predicts.

More important, improving fundamentals coupled with investors' recent experience in 2015 suggest this move will be more sustainable. As lead analyst Richard Xu explained in the note...

Rebound in corporate profit growth and still-high savings rate will support fund flows to quality equity names. This will be a lasting but somewhat gradual process, unlike the boom in 2015.

In other words, despite the big gains in Chinese stocks this year, all signs suggest the real rally hasn't even started yet.

One last note before we sign off...

As you likely know, we held our first-ever cryptocurrency webinar this week.

Porter was joined by our friend and colleague Tama Churchouse – editor for our corporate affiliate, Stansberry Churchouse Research – for an in-depth conversation on bitcoin and other "cryptos." If you joined us, we hope you enjoyed it as much as we did.

But if you couldn't make it, it's not too late to take advantage of a special discount on Tama's exclusive new cryptocurrency advisory, Crypto Capital.

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If you have any interest in speculating in cryptos, you owe it to yourself to learn more. Tama will even give you a full 30 days to try this service, absolutely risk free. Click here to learn more.

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